Japan's Factory Output Posts Surprise Decline In February

Japan’s industrial output fell unexpectedly 0.1 percent in February, against analysts’ estimate of a 2.5 percent increase, indicating that the world’s third-largest economy is in for a slow recovery. However, core CPI declined by 0.3 percent year-on-year, better than the forecast of a 0.4 percent decline.

According to the data released Friday by the Ministry of Economy, Trade and Industry (METI), Japan’s industrial production, which measures the total inflation-adjusted value of output from manufacturers, mines and utilities, fell 0.1 percent month-on-month in December, from 0.3 percent in the preceding month.

The main reason for the fall in output was a 5.0 percent decline in the production of electronic parts and devices on weak smartphone demand and sluggish manufacturing in China, a METI official briefing reporters on the data said.

The world’s third-largest economy is battling deflation, falling exports and an investment slump, forcing the newly-elected Shinzo Abe government to resort to radical monetary measures to stimulate growth. In addition to increasing public spending, the Abe government adopted export-friendly monetary policies that have led to the sharp depreciation of the domestic currency.

However, economists point out that it would take more time for Abe’s policies to translate into economic growth.

"There are a lot of expectations for Abenomics, but in reality, there's still ways to go. Japan's economy has finally bottomed out, but it still isn't in recovery," Takeshi Minami, Chief Economist, Norinchukin Research Institute said. A recovery should emerge mid-year, he added, the MarketWatch reported.

The data on industrial output also shows that the Japanese manufactures have cut down their inventories by 2 percent indicating in February a recovery in industrial production.

"As economies recover overseas, exports will increase. The outlook isn't that pessimistic. A recovery is expected mid-year or later half of the year," Junko Nishioka, chief economist at RBS Securities Japan said.

A separate official data showed that core CPI that excludes fresh food fell for the straight fourth month and was down 0.3 percent in February, but is still far from the central bank's target of two percent inflation. New BOJ Governor, Haruhiko Kuroda has set a two-year period to achieve the target of 2 percent inflation, but said it wouldn’t be an easy task given the economic slowdown in major foreign economies.

"It will take about six months for a weaker yen to be felt in exports, while overseas economies including China have not yet gained momentum in their recovery," Takeshi Minami told Reuters.

Japan’s economy is struggling to shrug off a mild recession and deflation as the economic growth contracted 0.1 percent on a quarter-on-quarter basis and by 0.4 percent annually in the fourth quarter ending Dec. 31.

In another encouraging sign, the Markit/JMMA Japan Manufacturing Purchasing Managers survey showed overall manufacturing activity growing in March for the first time in 10 months. The Manufacturing PMI that measures the activity level of purchasing managers in the manufacturing sector stood at 50.4 in March from 48.5 recorded, a month ago. A figure above 50 indicates expansion in the sector.